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Greenspan Foresees No Recession, Interest Cut

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TIMES STAFF WRITER

Federal Reserve Board Chairman Alan Greenspan said Tuesday he does not think the nation is heading into a recession, and implied that despite the Bush Administration’s wishes, the Fed does not plan to push interest rates down further.

His comments, delivered during testimony before the congressional Joint Economic Committee, appeared likely to intensify the dispute between the Fed and the White House, which has been criticizing the central bank publicly for keeping money and credit policies too tight.

But Greenspan told the panel that the Fed still sees sufficient momentum in the economy to offset any fears of an imminent recession. He warned that inflation--which he said has edged to an “unacceptable” rate--is “the greatest threat of recession that we have.”

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Although the Fed chairman did not say so directly, his emphasis on the continuing strength of the economy was an unmistakable signal that the Fed is not likely to push interest rates lower.

Asked at one point whether a remark he made meant that he agreed with White House assertions that interest rates ought to come down further, he said: “I wouldn’t interpret it in that manner.”

Greenspan also said he thought Sen. Daniel Patrick Moynihan (D-N.Y.) “raises the correct issue” by complaining that Social Security surpluses, intended for use when baby boomers retire, are being diverted to pay for other programs now.

But he said Moynihan’s proposal to cut back the payroll tax is likely to exacerbate, rather than correct, the problem. If Moynihan’s plan were adopted, he said, Congress either would have to raise Social Security taxes “very substantially” early in the next century or scale back benefits.

Greenspan’s comments marked the clearest signal in recent weeks that the Fed intends to halt its recent push toward still-lower interest rates, despite White House grumbling that to do so might tip the economy into a slump.

Two other Fed governors, Vice Chairman Manuel H. Johnson and board member Wayne Angell, expressed similar views earlier this month in interviews with the Wall Street Journal, but did not speak for the entire board.

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Greenspan’s remarks had an immediate impact in the financial markets. Both stock prices and bond prices fell during early trading. Analysts said Greenspan’s comments had “put a damper” on the market.

The dispute between the White House and Greenspan has been an on-again, off-again thing. The Administration generally has left the Fed alone, but recently Budget Director Richard G. Darman and White House economist Michael J. Boskin privately both have urged the Fed to ease its policies.

The flap became public again when Marlin Fitzwater, the President’s press secretary, told reporters a week and a half ago that new, more moderate inflation figures published that day suggested that “lower interest rates are justified.”

Greenspan on Tuesday called Fitzwater’s remarks “inappropriate.” But he dismissed suggestions that the disagreement between the Administration and the Fed was serious. “I did not consider that the President was bashing us then,” he recalled.

The Fed chairman’s assessment of the economy came after lawmakers expressed concern that a recession may be imminent. New figures published Friday showed that economic growth slowed virtually to a halt late last year, with overall economic output expanding only by 0.5%.

But while acknowledging that the economy “has been less vigorous,” Greenspan dismissed much of the weakness to longer-term factors--that consumers have caught up, for the moment, in replacing their old cars; that housing is overbuilt; and that capital spending has slowed.

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But he said the economy also is showing some more favorable signs: Demand for big-ticket items still is high, exports still are booming and businesses so far have not accumulated vastly bloated inventories, as frequently has been the case before past recessions.

As a result, Greenspan said, the recent weaknesses “probably do not suggest anything more than a temporary hesitation” in the record-long economic expansion, and “the probability of a recession now is less” than it was even a few months ago.

Nevertheless, Greenspan conceded that although the prospects that the economy will plunge into a recession may have diminished, he still thinks the risk remains. “I don’t think we will get a (definitive) handle on it until spring,” he said.

The Fed chairman’s warning about Moynihan’s proposal to roll back Social Security payroll taxes came in response to questions by committee Democrats. Greenspan was chairman of a blue-ribbon panel in the early 1980s that recommended putting money from surpluses into escrow to finance future benefits.

Greenspan said that panel members had envisioned that at least some of the surpluses would be diverted to finance ordinary spending, not just Social Security benefits, but not to the extent that currently is the case.

“The problem I have with the Moynihan proposal is that merely cutting the payroll tax doesn’t answer how” the government might be able to come up with a “pay-as-you-go” system to replace it that will be able to meet the demands of baby boom generation retirees, he said.

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“Either you are going to have to raise taxes very substantially at the time (during the first two decades of the 21st Century) or basically scale down the benefits,” he said. “The situation is made worse, not better” by the Moynihan plan, he told the group.

In other comments, Greenspan told the committee that:

--Despite the tight budget situation, which limits the government’s flexibility to fight a recession, the Fed will have adequate tools with which to combat a slump if the economy does take the plunge. But he declined to say specifically what those might be.

--The best way to force interest rates down sharply would be for Congress to reduce the budget deficit significantly. “If there is a significant budget compromise, the first thing that would happen would be that long-term interest rates will fall dramatically,” he said.

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